More government investment promised

CHINA - Forecast 06 Feb 2019 by FAN Gang and Chunyang Wang

Infrastructure investment growth saw its first rise in October 2018, up 3.7% y/y, and up 0.4 pps from September. This has been underscored in recent intensive announcements for new openings and approvals of mega-projects. The Chinese government’s relatively low public debt, at 47.6% of GDP, has made such investment possible, and sustainable for some time. Both infrastructure investment and tax cuts will generate growth, and the former will give a boost to the economy, even in the short term.

Investment was up 5.9% y/y in 2018, and up 0.5% y/y in real terms, down 1.3 pps and 0.8 pps, respectively, from 2017. But in Q4 investment sped up, and rising 7.5% y/y. The State Council approved a 2019 quota for new local government bond issuances of 1.39 trillion yuan. Moreover, FDI rose 3% in 2018, to $135 billion. The investment boost is necessary, as the slowdown is mainly due to the uncertain global geopolitical environment. We also expect capital allocation efficiency to be enhanced, after the intensive anti-corruption campaign running since 2013.

GDP rose 6.6% y/y in 2018, down 0.2 pps from 2017. Growth rates declined each quarter, falling from 6.8% y/y in Q1 to 6.4% y/y in Q4. Manufacturing is the main reason for growth slowdown, with growth falling from 7% y/y in Q1 to 5.7% y/y in Q4. Fixed asset investment was up 7.2%, down 0.9 pps from 2016. Real estate sales growth cooled dramatically, and exports picked up instead.The RMB has appreciated 8.8% y/y against the dollar since 2017, but has been virtually flat against a basket of major currencies. Producer prices continued last year’s appreciation trend. The ex-factory price of industrial goods rose 6.3% y/y, and PPI rose 8.1% y/y. The main financial indicators experienced major drops.

Exports were up 7.1% y/y in 2018, down 3.7 pps from 2017. Imports rose 12.9% y/y, down 5.8 pps. Exports and imports slowed at yearend. We believe trade war might be a main factor, though net exports comprise a small share of Chinese GDP. Auto sales have been plunging since June, marking the first annual negative growth in three decades. Though peer analysts blame the 2018 elimination of the auto sale tax rebate, we blame economic slowdown, a crowding out from the housing boom and regulation of consumer loan shadow banking. But we also view auto sales decline as a short-term phenomenon.

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